You open Command Prompt as Administrator .
You install Windows normally, choosing the internal drive (or even another external drive if you want a portable Windows). The external installation drive stays untouched unless you deliberately format it.
In the end, you sit back, watch the “Getting files ready for installation” screen, and realize: an old external hard drive just saved you from hunting for a DVD or an 8 GB flash drive.
You plug the external drive into the target computer, restart, and enter the boot menu (usually F12, ESC, or F2). You select “USB Hard Drive” or the external drive’s name. The computer boots straight into the blue Windows Setup screen — just as if you were using a USB flash drive.
Then you use bootsect /nt60 F: (where F: is your external drive) to write the Windows boot code onto it.
You plug the external hard drive into a working computer. It’s 500 GB, mostly empty. You know Windows setup won’t need all that space, but the drive has to be bootable.